The Timeshare Death Spiral

The Timeshare Death Spiral

I’ve coined many phrases during my many years in the Timeshare Disposal business.  Here’s another one….' The Timeshare Death Spiral’.  This refers to the process by which a timeshare resort goes from being a lovely, manicured, well maintained vacation spot to a lifeless, mold infested, rat trap.  Let me explain.

When a resort is new it usually has a relatively low maintenance fee with low reserves.  The ‘reserves’ are the amount of money that the resort collects with the maintenance fee and squirrels away for major replacements in the future.  These are items like boiler replacements, air conditioning units, roofs, parking surfaces, pools, etc.   Someone figures out when in the future that item is expected to need to be replaced and how much it will cost.  Then they figure out how much money needs to be put away each year so that the money is available when that work needs to be done.  That money is collected in your maintenance fee and put into a special bank account dedicated specifically for these Future Reserve funds.

At the start of a timeshare regime, the developer usually runs the resort until such time as the sales are completed and the developer turns the place over to the timeshare owners to operate themselves via a board of directors.  Some resorts decide to hire an ‘in-house’ manager to run the day-to-day affairs while other resorts decide to hire a professional management company. In either case these managers want to keep their jobs.  Unfortunately, there will usually come a day when these managers must choose to make the ‘right’ decision and risk losing their jobs or make the ‘wrong’ decision in an attempt to keep their jobs.  Let me explain.

As time goes by and resorts get older it is natural that they will need more and more repairs, refurbishing, replacement, and updating.  All of these things cost money.  This is what the Reserve account is supposed to take care of.  If the money was collected properly over the years there is supposed to be sufficient funds in the Reserve account.  But in many cases there isn’t enough money.  Many things occur over the years that cause this shortfall, but the most common is poor management decisions.  You see, managers are accountable to the resort’s board of directors.  The board is accountable to all of the owners.  Maintenance fees are almost always a contentious issue (most people complain that their fees are too high and are always increasing at a ridiculous rate) and so the pressure is always high for managers and boards to keep costs down in order to keep maintenance fees as reasonable as possible.  Managers are always fearful of losing their jobs due to rising expenses, so it is very common for a manager to raid Reserve funds to pay for every-day expenses in an attempt to show the board that he is doing a great job keeping maintenance fees from increasing.  The manager is a hero (temporarily) and gets to keep his job for a while.  Of course the day comes when the resort needs a new roof and there is no money in the reserves.  The manager is fired but the board is forced to pass a hefty Special Assessment in order to replace the roof.  While most owners end up paying the assessment, some can’t afford it or just simply consider it the Straw-that-Broke-the-Camel’s-Back and refuse to pay the assessment as well as any future maintenance fees.  In other words they abandon their timeshare ownership.  This forces the board to dramatically raise maintenance fees to compensate for the sudden spike in owner defaults.  This dramatic hike in fees pushes even more owners to default, which forces the board to hike fees again, which causes even more defaults, and on and on and on it goes, year after year.  Until one day there are more owners in default than there are owners still paying their maintenance fees.  During this downward spiral the resort is forced to adopt an austerity policy.  Only the absolute essential services and repairs are allowed.  Perhaps the place is kept clean but carpets are allowed to get old, dingy and stained.  Cracked tiles are not replaced. Walls go unpainted even though they are desperately in need. Mattresses are not replaced when they become uncomfortable. You get the idea.  The whole place goes downhill and becomes obsolete. 

At this point the correct thing to do is to close down the Timeshare Regime, sell the property, and split the proceeds among the timeshare owners.  Because most timeshare resorts are located in popular vacation destinations, the property tends to be quite valuable which would usually bring a few thousand dollars to each owner.  The timeshare industry in the United States began in the 1960’s and started to take off in earnest in the 1970’s, there are many timeshare resorts that are more than forty years old around the nation.  So many of them are in terrible financial condition and simply too old and beaten up to be considered anything but obsolete.  Therefore we have begun to see Timeshare Regimes closing and selling, however it is not occurring as much as it should.

You see, while the ‘correct’ decision may be to close those Timeshare Regimes that have become obsolete, greedy management companies will do anything they can in order to prevent that from happening.  If these resorts do indeed close, the management company loses their contracts and the income they receive.  To prevent that from happening management companies will manipulate their boards and keep them from making that correct decision to close shop and sell the assets.  Instead, they continue to send out those maintenance invoices (along with those threatening letters to those that don’t pay up) and keep the resort limping along even though practically no one wants to vacation there any longer.  Eventually something will have to give.  Perhaps things will just get so bad that the health department will come in and close the place down, thus forcing the board to see clearly what their management company has been doing to them all these years. 

So, there you have it.  The Timeshare Death Spiral.